One of the go-to guys on trade litigation between the US and China is Bill Perry, a Seattle-based attorney who spent the 80s at the US International Trade Commission, the Office of Chief Counsel and Office of Antidumping Investigations, and the US Department of Commerce. While tackling all sorts of anti-dumping and countervailing duty cases, he runs a blog that covers what it says on the tin: US China Trade War And if you ask him about the fast-escalating case involving China’s ZTE Corp, Bill will offer you one word: Hòumén (back door or 后门 in simplified Chinese.
While, sometimes, moments of unique creativity from those trying to get money out of China come out from behind the curtain to take a bow — losing a lawsuit on purpose and ants moving house, for example — the really large flows outwards have remained pretty opaque. Less opaque now though. Both Christopher Balding and Deutsche’s chief China economist Zhiwei Zhang have taken a long hard look at how capital is flying out of China, despite capital controls which shouldn’t be sniffed at… but clearly are to a large extent. tl;dr: It’s the over-reporting imports that we should blame.
For years the Chinese government accumulated claims on the rest of the world, with foreign reserves soaring almost continuously to a peak level of just under $4 trillion in 2014. Then things went into reverse:
Earlier this month at the annual meetings of the American Economic Association in San Francisco, Justin Yifu Lin argued that China’s growth slowdown has been mainly the result of external and cyclical factors rather than structural transformation. His case rests on the idea that other East Asian and emerging-market economies had also decelerated in recent years, some of which — Hong Kong, Singapore, Taiwan — do not have the same structural problems that are thought to plague China’s economy. Furthermore, Brazil’s decline has been much sharper than China’s, while India in 2012 also slowed dramatically before rebounding; China can rebound too.
We don’t think of China as an oil producer. And yet, it very much is. China’s oil production in 2014 amounted to about 4.2 mbpd in 2014, according to BP statistics — equal to that of Canada’s production at 4.2 mbpd in 2014 and nearly double that of Nigeria’s at 2.4 mbpd. Then, of course, there’s the mark-to-market value of China’s strategic petroleum reserve, which the country has been building up for years. We don’t know the actual size of the SPR because the numbers are not public, but oil experts say it stands close to 100m barrels, with a sizeable portion of the reserve built up during the $80-$100 per barrel price era.
To understand what happened in China this week we think the best financial analogy for China’s management of its economy and its external capital account is this: think of it as a giant money market fund. So when the currency was officially devalued three times, it was equivalent to the Great China Money Market (GCMM) fund “breaking the buck”, a rare event when presumed safe investments turn out to not be so safe as thought. We’re going to explain what that means in two posts, the first of which is the extended history of China’s economic management needed to realise how the world got to this point in the first place.
China weakened the renminbi fixing by 1.86 per cent overnight, an unexpected move followed by the biggest one-day change in the value of the renminbi since the country abandoned its dollar peg for a managed trading band. There are two schools of thought on this: Either balance of payment problems are forcing China’s hand, or the move is just another step in the slow and benign process of capital liberalisation. On the first, well hey, they would depreciate in the current environment wouldn’t they? Exports are weak, the economy is sputtering, and the stock market can’t stay up without the state introducing a ban on it going down. Move to a free-floating currency system? Meh. This is just another desperate devaluation story in the style of Nigeria, Russia before them and even peg busting Saudi Arabia on the back of a hard-currency drought in the offshore FX market. (FT Alphaville has predicted this for like ages, yeah?).
Quite obviously, not many people take China’s own statistics at face value. Also quite obviously, China is a hard economy to accurately measure anyway. It’s really quite big and its pace of change has made grasping any bit of it for very long more than difficult.
With an unspoken currency war supposedly upon us and a cry for China to join in — according to BofAML the market is pricing about a 30 per cent probability of a 10 per cent devaluation of the CNY this year while insistent market forces push the yuan down anyway — we thought a lopsided CNY depreciation pro and con list from Nomura might be helpful: Pros 1. Makes exports more competitive, helping to boost growth. 2. Raises the cost of imports, helping to reduce the risk of CPI deflation. Cons
Or the risk of “lethal damage” if you’re into that sort of thing. As said before, we’ve had 34 months and counting of negative PPI inflation in China with CPI at best lacklustre — coming in at 1.5 per cent in December. The risk is that, in a country charmingly wrapped in debt based uncertainty, we get outright deflation.
As a brief follow-up to yesterday’s post on the impact of US trade with China on US employment and incomes, we thought it would be useful to visualize a few interesting facts about the evolution of the bilateral trade balance over time. First, look at how the deficit in the trade of goods swamps the modest surplus in the trade of services. Whilst the data on services are annual and stop in 2012, the general picture would probably not look much different even if it were more up to date:
This Reuters story about China having up to 1,000 tonnes of gold tied up in financing deals is doing the rounds, courtesy of information out of the WGC. But it’s hardly a revelation. We’ve known that China has been using gold (and almost everything else under the sun) for financing purposes for ages. Goldman even blessed us with a more recent update about the shenanigans in March:
And on the seventh day it fell again, in accordance with the PBoC… which cut the fixing rate. Pity the RMB carry trade, no matter what the reason. Deliberate carry trade rumbling, trade band widening to allow greater market control of the exchange rate… or maybe, just maybe, that China is kinda thinking that a depreciating yuan ain’t a terrible policy right now.
Following Matt Taibbi’s “Vampire Squid operates in commodities” exposé, here’s an apropos update on recent LME inventory declines from the evil one itself. As analysts at Goldman Sachs noted on Friday, it looks increasingly like copper inventory is heading off market into completely opaque stores in China as a result of renewed financing deals (CCFDs), rather than being depleted due to true market deficits: We continue to believe LME inventory declines reflect stocks shifting off market rather than a deficit market, due to CCFDs and the impact of the new LME rules. Spread tightness in our view owes to the fact that CCFDs change copper from a negative carry asset (storage costs, financing costs) to a positive carry asset (where interest rate arbitrate > storage, financing, and hedging costs). Since we do not expect these deals to end anytime soon, LME spread tightness is very likely to persist, with risks that spreads tighten further during the seasonally strong period of demand in 2Q. Which is a neat way of saying “don’t blame us for tight spreads, blame China”. And … “by the way, new LME rules aren’t working just as we predicted”.
Bored with zero interest in the bank? Why don’t you check out the latest in aluminium-backed deposit accounts? You take the excess aluminium off our hands, we sell it forward, and hey presto you get interest rates conventional banks just can’t beat! (It’s the way the gold market has been compensating for its oversupply for generations.) (Terms and conditions apply.) All of which is another way of saying the world’s aluminium oversupply burden has created some excellent carry opportunities in the off-market storage space over the last few years.
- Jim Millstein discusses the financialisation of America
- Alphachat is on hiatus this week
- Benn Steil explains the Marshall Plan
- Marcel Fratzscher on the dark side of the German economy — now with transcript!!
- Marcel Fratzscher explores the dark side of the German economy
- Emi Nakamura on calculating inflation
- Stephanie Kelton explains how the government budget affects the economy and the mechanics of student debt forgiveness
- Jonathan Knee explains 25 years of Wall Street’s evolution
- Marcus Noland explains the North Korean economy
- Brad Setser explains how corporate tax policy affects the balance of payments
- Michele Wucker explains “Gray Rhinos”
- Listen - The "gray rhino" theory
- James Heckman tells us why IQ is overrated
- Mihir Desai explains the wisdom of finance — Now with transcript!
- Mihir Desai explains the Wisdom of Finance
- Can we avoid another financial crisis?
- Hirschmania, the final chapter
- The life and speeches of Sadie Alexander
- Kim Rueben on the fiscal impact of immigration
- A sit down with Adair Turner
In this edition of Alphachat, Michael Pettis, Professor of Finance at Peking University and the original Alphachat guest, joined Cardiff, Kate and David to discuss China and its apparent drive to reorient the economy.
Kate’s post on the June China trade data mentions that commodities imports were the only bright spot (although it’s a somewhat dubious bright spot if it indicates a resurgence in investment). It turns out that copper imports were particularly strong, recording a 9.7 per cent year-on-year increase in June, a rather large change compared to a 14.6 per cent decline in May. Goldman point us to one compelling reason why that might be the case. It’s basically another case of whack-a-mole financing in China. Hit over-invoicing over the head and up pops ‘Cash For Copper’ (CFC) financing.
The PBOC’s “this is not the liquidity crisis you’re looking for” statement at the weekend may have drawn attention, but it didn’t really manage to reassure equity markets. The Shanghai Composite closed over 5 per cent lower on the day:
China’s energy consumption is legendary (okay, its everything consumption is legendary). More coal, oil, hydro, solar, and wind power than… than just about anyone. The coal numbers in particular are mind-boggling. By 2011 China was consuming almost as much coal (3.8bn tonnes) as the rest of the world combined (4.3bn tonnes). The figures on oil consumption are almost as striking. They consume about 10m barrels a day; more than 10 per cent of world production.
The ‘currency wars’ are usually a bit more abstract than this. Just as the Japanese look to be finally weakening their stubborn yen and spur some inflation in a stagnant economy, there is a suggestion, just a suggestion mind, that a deliberate plan to scupper, or at least hinder, that plan might be afoot.
Earlier this week Paul Krugman went out of his way to point out that if China stopped buying US bonds, it wouldn’t be the end of the world. We wanted to come back to some of his points, because well, we think they are pretty good.
Remember how China was being buried alive in copper a few months ago? The stuff was piling up in carparks? Now it’s even WORSE. Judy Zhu and Han Pin Hsi, the Standard Chartered analysts who brought us the carpark images back in April, have been on another fact-finding mission, this time beginning in Waigaoqiao where they found this:
Remember the days when Chinese banks used to routinely drain dollars from Chinese corporates? The days when the Chinese corporate sector was a net dollar seller? Those days, it seems, may have very abruptly come to a halt.